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Industry wary of E-grocers

By Kevin Kenyon

Peapod, one of the largest online grocers, generated $69 million in sales last year.

As the U.S. shopping center industry continues to monitor the growing impact of e-commerce, much of the focus has been on the nation's malls, which sell the items thought to be most vulnerable to online competition.

But the industry is starting to pay closer attention to the supermarket-anchored community and neighborhood centers, which have begun sharing customers with online grocery retailers.

Until recently, grocery-anchored centers -- which account for the vast majority of the country's centers -- were viewed as safe havens for those wary of online sales.

But some fear that the impact of supermarket sales will eventually be felt by the landlords who own those properties.

Moreover, a common belief among mall owners that the Web will never replace the actual shopping experience may not hold true, as shoppers may welcome the opportunity to eliminate the "chore'' of grocery shopping.

"It's certainly an interesting phenomenon for all of us to watch," said Mark Mancuso, director of community center development for CBL & Associates Properties, Chattanooga, Tenn. "Everyone who is a bricks-and-mortar person has to keep a keen eye on how the Internet is going to affect their business."

Sales of groceries on the Internet have been relatively low up until now ($200 million in 1998), but industry insiders say that could change, and the potential impact on the $439 billion supermarket industry needs to be looked at seriously.

Some groups, such as Cambridge, Mass.-based Forrester Research, predict that online grocery sales will total $10.3 billion by 2003, while others such as Emarketer, an online marketing service, foresee a figure in excess of $7 billion. Andersen Consulting predicts that 15 million to 20 million households will be grocery shopping online by 2007.

More recently, online grocery retailing has been viewed as a "laggard" among e-commerce businesses.

Items in this category fetched less than $200 million online in 1998 -- less than 5% of total online sales for the year, according to ICSC's research department.

"When you look at the logistical obstacles involved in online grocery retailing, it's not surprising that this category is a graveyard of Web retailers," said John Konarski III, ICSC's senior vice president/director of research. "Forecasters are very much at odds about how the online grocery business will progress, given the problems involved with efficient, cost-effective and timely delivery services."

The main obstacle to this point, observers agree, has been the inability to figure out how to deliver groceries and still make a profit, mainly due to the high costs associated with maintaining warehouse and delivery services.

Many consumers also seem reluctant to set aside a window of time during which groceries can be delivered.

One of the biggest names in Web grocery retailing -- Peapod -- generated $69 million in sales last year but still ended up losing $21 million, according to Konarski.

Besides Skokie, Ill.-based Peapod, which has recently shifted its approach from supplying shoppers with groceries from local supermarkets to opening up its own warehouses, the segment includes Webvan, launched this past June in Oakland, Calif., by Borders Books founder Louis Borders.

In July, Webvan struck a $1 billion deal with an engineering firm to build distribution centers in 26 new markets across the country over the next two years.

The Atlanta market is up next, said Chris Mannella, Webvan's vice president of marketing, who added the plan is to enter as many markets as quickly as possible.

"If you look at the three categories we're focusing on right now -- grocery, over-the-counter drugs and prepared meals -- that amounts to about a $660 billion industry, so we certainly see that as a huge opportunity," he explained.

If all goes as planned, Mannella said Webvan will provide a nationwide alternative to traditional supermarkets.

"We already offer everything you can find in a large grocery store, so it's really up to the consumers -- they can use Webvan any way they like -- and that might mean completely replacing the weekly trip to the supermarket."

The battle of the booksellers gained new life earlier this year when officials at Amazon.com bought a stake in Bellevue, Wash.-based HomeGrocer.com, which serves Seattle and Portland, Ore.

And Netgrocer, the only company currently serving customers nationally, sells nonperishables.

Other players include Yourgrocer.com, for shoppers in New York City and southern Connecticut, as well as ShopLink and Streamline, which both serve customers in New England.

A few traditional supermarkets have also ventured into the online arena, including Somerville, Mass.-based Hannaford Bros., which launched its own delivery service -- HomeRuns -- in Boston in 1996.

As of now, however, it appears that online grocers have a long way to go before shopping center developers are truly threatened.

The impact of Homegrocer.com on traditional grocers in the Pacific Northwest has been minimal at best, according to Mark Fitkin, managing director for the Portland office of CB Richard Ellis, the largest retail brokerage firm in the city.

"Everything that I've seen tells me that online grocery shopping is going to affect those people that plan their shopping trips," he said.

Fitkin said warehouse club retailers like Costco will probably be affected the most. "If you were to survey shoppers about how often they had a laundry list of items to buy, it would probably be a pretty low percentage, but in the case of warehouse retailers it's more of a planned trip."

For now, however, online grocery shopping is not viewed as a major threat by traditional grocers, according to Jeffrey Metzger, editor of FoodWorld, a supermarket industry trade magazine based in Columbia, Md.

"I would say it's on the radar screen but it's sort of a far-flying object at this juncture," he said. "It will definitely be a growing factor, but a question that people have been unable to quantify yet is how much growth is really out there."

Even if the quirks of the delivery systems are ironed out, Metzger questions whether people are going to get to the point where they don't want to touch and squeeze their fruits and vegetables.

"It's really difficult to gauge at this point, because even some of the big guys are not national yet -- many are still in test phases in isolated markets," he said. "So far they are having limited success, which is drawing a small percentage from the mainstream supermarket business."

Traditional grocers, Metzger added, are still more concerned with a Wal-Mart opening 10 miles away than with anything Peapod is doing.

"Right now it's something that everybody is watching, they're intrigued by it, they see it as being a factor, they just can't quantify it and say what percentage of their business it's going to effect."

At the A&P supermarket chain in the Northeast, officials say they are aware that the issue cannot be ignored.

"They do compete for some of the same customers that we do, so in that sense they do represent a new competitive force for us to deal with," said Andy Carrano, vice president, group marketing services for the Montvale, N.J.-based company. He noted his company is also looking at what it can do online.

It may take a whole new generation of shoppers before supermarkets are truly threatened, said Norman Kranzdorf, president of Conshohocken, Pa.-based Kranzco Realty Trust.

"We're certainly mindful on the impact of the Internet on life, but supermarkets are probably the last frontier we envision a deep impact on," he said. "We probably have a couple of supermarkets in our portfolio which do as much volume as Peapod, and it would take a long time and a huge change in the dimension of shopping before it really has a significant impact."

"As far as traditional grocery shopping in the suburbs is concerned, I don't see it having a big impact," he said. "In my mind, serious shoppers still like to smell the melons and see the color of the meat."